8098 / What is a donor advised fund?

A donor advised fund is a fund or account that (1) is separately identified by reference to the contributions of the donors, (2) is owned by a sponsoring organization, and (3) allows donors to have advisory privileges with respect to distributions and investments. A donor advised fund does not include a fund or account that makes distributions to only one charity. Nor does a donor advised fund include a fund or account with respect to which the donor advisor advises regarding grants for travel, study, or similar purposes if (1) the advice is given as a member of a committee appointed by the sponsoring organization, (2) the committee is not controlled by such donor advisors, and (3) grants are made on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the sponsoring organization and meeting certain statutory requirements. A sponsoring organization can generally be any charitable organization other than a governmental entity or a private foundation.¹

A donor advised fund allows the donor to avoid the expense of starting a private foundation himself. These funds are sponsored by commercial investment or financial companies (e.g., mutual fund companies), and also by community foundations. Donor advised funds differ from pooled income funds in that they do not provide for a lifetime income stream to the donor or other beneficiary.

A charitable deduction for a contribution to a donor advised fund is allowed only if
(1) the sponsoring organization is not a war veterans organization, a fraternal order or society, a cemetery company, or a type III supporting organization that is not functionally integrated; and (2) the donor receives a contemporaneous written acknowledgment from the sponsoring organization of the donor advised fund that the organization has exclusive legal control over the assets contributed.²

The Service has provided interim guidance regarding the application of certain requirements enacted under PPA 2006 that affect donor advised funds.³

An important factor when analyzing donor advised funds is the amount of control that can be exercised by the donor over the fund’s distribution of his contributed funds.⁴ See also Styles v. Friends of Fiji,⁵ in which a purported donor advised fund did not qualify as a publicly supported charity, but instead as a private foundation, where: (1) the potential donors had personal connections to the trustee; (2) the trust did not intend to employ a professional fundraiser (or similar fundraising program); (3) the trust did not budget any money on fundraising activities; and (4) no written documents explained how the trust would solicit funds from the general public who were unknown to the trustee.⁶ The Court of Federal Claims has ruled that a donor advised foundation does not qualify for tax-exempt status under IRC Section 501(c)(3).⁷

In two private letter rulings approving what the recipient of the letter rulings referred to as “donor managed investment accounts,” the Service approved an arrangement where:
(1) under agreements between donors and the charity, donations would be placed into an account;
(2) each donation would be unconditional and irrevocable; (3) donors would surrender all rights to reclaim ownership, possession, or a beneficial interest in any donation; (4) donors or their investment managers would be permitted to manage the investments in the account for 10 years under a limited power of attorney, subject to certain investment restrictions and limitations; (5) the charity would have the right at any time or for any purpose, and in its sole discretion, to withdraw all of the assets held in the account or to terminate the limited power of attorney and the agreement; and (6) the agreement would terminate automatically in cases of severe loss as determined by the charity in its sole discretion.

Approving the arrangement, the Service reasoned that the retention of investment management control by the donors, subject to the restrictions and limitations in the agreements, was not substantial enough to affect the deductibility of the property contributed, and did not constitute the retention of a prohibited partial interest under IRC Section 170(f)(3) (see Q 8077).⁸ The Service also concluded that a proposed “online” donor advised fund would be able to treat contributions made through the donor advised fund as support received from the general public for purposes of meeting the public support test under IRC Section 170(b)(1)(A)(vi) and IRC Section 509(a)(1) and also citing Treasury Regulation Section 1.507-2(a)(8).⁹ The Service privately ruled that the creation of a donor advised fund by a supporting organization did not adversely affect the tax-exempt status of the supporting organization.¹⁰ Transfers by donors to donor advised funds established by a public charity were not subject to material restrictions or conditions and, thus, could be treated as public charities.¹¹